Self-Employed Tax Questions: How Is Freelance Income Taxed?

As a freelancer, you must realize that you may incur federal and state taxes on your freelance income. This article will help you sort out the possible tax consequences of making money as a freelancer or independent contractor.

First, you must understand that your freelance income is treated as self-employment income in the eyes of the IRS. Whether you knew this already or not, a freelancer is considered a self-employed sole proprietor for tax purposes. You must therefore report your income and related expenses on Schedule C of your personal income tax return. Any profit will be included with all your other income on page 1 of Form 1040 and be subject to federal income tax. In addition, if you have at least $400 of profit, that profit will also be subject to self-employment taxes, which is calculated on Schedule SE and transferred to page 2 of Form 1040.

Self-employment taxes are the self-employed person’s equivalent of Social Security and Medicare taxes that all employees have withheld from their paychecks. Usually the employee’s share of these two payroll taxes is about 7.65% of gross wages; this 7.65% is withheld from the employee’s paycheck. The employer must also pay the same 7.65%; this is known as the employer match. But self-employment income (such as your freelancing profit) is subject to both the employee’s and the employer’s portion of Social Security/Medicare taxes, or about 15.3% of Schedule C profit.

So, when you are thinking about how much money you are actually making from your freelancing work, remember this: your profit will likely be subject to the 15.3% self-employment tax, plus federal income tax (which could be at least 10% or 15% or more), plus any state income tax (which can vary greatly, depending on what state you live in). Altogether, you could end up paying 35% or 40% or more in total taxes on your freelance income.

Even if you must pay one-third of your freelance income to the government, I trust you still think it was worth it, because you still got to keep two-thirds of your gross compensation. Also keep in mind that it is very common for self-employed people to incur this kind of tax liability. It’s just the way our tax system works.

The other possibility is that your freelance expenses are greater than your freelance income. Hopefully this is not the case, but it does happen. In this situation, you have a loss on Schedule C, and that loss is transferred to page 1 of Form 1040 and is taken as a deduction against your other sources of income. In other words, if you lose money on your freelance activities, your income taxes will be reduced.

Whether you have a profit or a loss, being a freelancer can significantly complicate your tax situation, so I do recommend you seek assistance from a tax professional who can who help you properly report your self-employment income and expenses on your tax return.